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I may have gotten trapped!

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Yesterday morning it looked like markets were headed for a tail spin lower as the New York Composite (NYA.X) 451.71 +4.03% broke to a 52-week low and set the stage for a plummet lower. However a sharp reversal and over 2 billion shares traded by sessions end may have bears starting to think they've been trapped.

Today's bold move back higher in the NYSE Composite and the other major market averages on strong volume gives hope that a bottom may be in and that a bullish mid-term election year for October can still be found.

In this morning's 11:00 Option Investor.com update we looked at a chart of the NASDAQ Composite (COMPX) 1,212 +4.19% and wanted to monitor that broad index for potential resistance at current levels and identified a potential bullish entry point for a pullback near the 1,157 level, yet gains still build as the weekend approaches.

Lets take a quick look at the NYSE Chart, which bulls looking for pullbacks may want to use in their trade strategy.

NYSE Composite Chart - Daily Interval

In our Index Trader Wraps from last week at OptionInvestor.com, we talked a little about "traps" and it appears there may have been one yesterday morning in the NYSE Composite on the break to new lows that were "quickly" reversed higher. Bears that did get trapped and didn't follow with a protective stop above 436 are now looking for some type of pullback to the 436 level to limit some bearish exposure after a bullish move has been found that was more powerful than expected.

I don't believe that there have been a lot of bulls trying to pick a bottom in the NYSE and that bears that had been systematically locking in gains on weakness with the lower levels of bullish %, might give this index one more bearish trade near the 453 level, and target the 436 level.

For bulls like me that don't like to chase a move higher below trend, I'm looking for pullback entries near the 436 level to not only find some patient bull support, but some support from bears that had been complacent and were OVERLEVERAGED in their bearish trades.

All sectors are in the green as I write with the Semiconductor Index (SOX.X) 248 +9.26%, Airline Index (XAL.X) 29.47 +8.14% and S&P Banks Index (BIX.X) 266 +6.19% leading gains. The only index up less than 1% has the Utility Index (UTY.X) 225 +0.70%.

Volume is brisk at just over 1.1 billion shares at both the NYSE and NASDAQ. This is decent follow through volume considering trading curbs have been in just after this morning's open.

While the major indexes show sharp reversals from yesterday morning, we see sharp reversals from breadth today as advancers outnumber decliners by a 4 to 1 margin at the NYSE while NASDAQ breadth is positive with 7 advancers for every 3 decliners.

New highs versus new lows is building from earlier levels as the NYSE shows 21 stocks at new highs versus 59 stocks hitting new lows, while NASDAQ show 17 stocks at new highs versus 127 stocks at new 52-week lows.

Treasuries are seeing a strong round of selling today as the benchmark 10-year YIELD ($TNX.X) jumps to 3.813%, while price falls -0.77% to 114'26 and breaks below its 21-day SMA. This may be a very bullish short-term indication for stocks as the December 10-year bond hasn't closed below its 21-day SMA since May 17th of this year!

While bulls can be patient and look for pullback entries, the selling in Treasuries and breaking of some short-term moving averages has bears increasingly nervous and should have them more willing to cover overly short positions on pullbacks as they feel competition from cash coming out of the Treasury markets near- term.

Jeff Bailey

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